The COVID-19 Pandemic: Supervisory Implications and Priorities for Islamic Banking

The financial sector including Islamic finance is certainly going to be significantly affected because of the devastating effects of the COVID-19 outbreak. In this respect, a number of questions have emerged for authorities supervising Islamic banking, for instance: Are there any specificities that require a different regulatory and supervisory approach to deal with the impact of COVID-19 on Islamic banks and to ensure robust navigation? How can supervisors ensure a level playing field while promoting economic growth and maintaining financial stability in dual banking systems?

This Note discusses seven potential implications and priorities for supervisors regulating Islamic banks in response to the COVID-19 pandemic in dual banking systems:

1. Ensuring supervisory transparency, clarity in regulatory interventions, and a level playing field for Islamic banks.
2. Navigating a tricky trade-off between regulatory capital requirements and economic growth.
3. Managing Islamic banks’ asset quality and the treatment of moratoria and nonperforming financing.
4. Dealing with a liquidity crunch and providing Sharī`ah-compliant liquidity support and lender-of-last-resort facilities.
5. Providing supervisory support for issuing sovereign Sukūk for fiscal deficits.
6. Evaluating stress testing and credit quality.
7. Reviewing financial safety nets and insolvency regimes for Islamic banks.